Are growth rates for plastics already starting to moderate?

Last month, the Business Cycle Dating Committee of the National Bureau of Economic Research determined that a trough in monthly activity in the U.S. economy occurred in April 2020 and the previous peak was February 2020.

Since NEBR is the official arbiter of business cycle peaks and troughs, we can now state with authority there was a severe economic recession last year and it lasted two months. This makes it the shortest U.S. recession on record.

We can also say that the current recovery actually started in May 2020, and it has now been unfolding for about five quarters. In recent weeks, I have spoken with a number of business managers and owners, including some in the plastics industry, who are inclined to think the recovery started just a few months ago — about the time the COVID-19 vaccines became widely available. But the data indicates otherwise.

The relevance of this is that the recovery period that follows the shortest recession on record is also likely to be shorter than average. In fact, I believe we may already be at, or very close to, the midcycle phase of the current recovery.

I can already hear your gasps and protestations. You may ask, "How we can already be at midcycle when many of us are still struggling to get back to something close to the pre-COVID levels? Aren't a lot of people still out of work? And what about the many segments of the manufacturing sector that are still trying to navigate through issues with the supply chain?"

I admit there are many reasons why it does not feel like we have reached the midcycle moment in Q3 2021, but that does not mean we can simply ignore the data. So allow me to present some evidence, and you can judge for yourselves.

First, I believe we have passed the point of peak growth in the rate of change curves for some of the dominant macroeconomic indicators. One of my favorite leading indicators for the overall economy is the trend in the rate of change curve for U.S. housing starts. The housing starts data is not just useful for measuring activity in the construction sector. It is also good for gauging the sentiment and spending patterns for American households.

The chart clearly shows that the rate of growth in the housing starts data has been accelerating rapidly this year. Through the first half of this year, total starts were up 25 percent when compared with the same period from a year ago. But as we move forward and get a few more monthly data points, I expect the data from the second quarter will represent the peak on this chart and the curve will soon start to trend downward.

Part of my reasoning for this is that the data from the third quarter of last year was not nearly as bad as the data from the second quarter. The year-over-year comparisons will become increasingly difficult in the second half of this year, and this means the rate of growth will gradually diminish. The annual pace of growth by the end of this year will be in the range of 10-15 percent, which is slower than the 25 percent pace of growth we experienced in the first half of this year.

Just to be clear, this does not mean my forecast calls for the seasonally adjusted number of housing starts to decline in the coming months. To the contrary, I expect the data on housing starts and many other segments of the economy to continue to expand for the foreseeable future. But the pace of growth in the monthly data for many industries, including many segments of the plastics industry, will decelerate. Midcycle does not mean the recovery period is ending; it means it is maturing and the growth rates will start to moderate.

Another factor in my forecast is the diminishing impact of government stimulus payments. These payments kept the economy moving last year, but much of the money has now been spent. American households still have a lot of excess savings in the bank, but most of these remaining funds are in accounts belonging to higher-income households. These households tend to spend from savings much more slowly than do lower-income households.

Lower-income households should continue to benefit from the steadily improving labor market, so a large portion of the spending that came from the stimulus payments last year will be replaced by rising incomes from wages. It is important to remember that the jobs data is a lagging indicator and the improvement in household incomes will not be sufficient to generate continued acceleration in the overall pace of economic growth.

There are two more issues looming over the horizon that will ultimately impede the pace of economic growth: rising inflation and rising interest rates. For now, the Fed has indicated a willingness to let inflation run hot in an effort to improve the employment numbers. But the Fed does not have complete control over either the rate of inflation or interest rates. If inflation continues to spiral upward, the Fed will have little choice but to put the brakes on the rate of economic recovery.

Finally, I cannot ignore the latest trends in the COVID-19 data. The latest surge in the Delta variant has started to erode the confidence levels for many consumers, and if this persists, it will soon start to affect their spending patterns in a negative way. As it pertains to my current economic outlook, I believe COVID will be with us for a long time, but it will not derail the current recovery. We have come a long way in our battle against COVID, and it is not nearly as big a threat to the economy or our collective health as it was last year. Nevertheless, this issue still carries some weight in many peoples' minds, and I cannot totally remove it from my list of potential risks to the economy.

The business cycle for the plastics industry closely follows the cycle in the overall U.S. economy. Overall, we are still in a very favorable spot in the cycle. But if peak growth is now behind us, then plastics processors and suppliers may need to adjust their expectations accordingly.